The Satisfaction–Profit Chain

The Advantages of Keeping Your Customers Satisfied

Graphics courtesy of ProspectrusOpens in new window

Does good customer service pay off?

That is the question many people consider before embarking on a survey to measure and improve their company’s ability to “do best what matters most to customers”.

The theory is fine! A customer who is well treated is more likely to bring more business your way, by repeat purchase, recommendation, putting a larger share of spend in your hands and so on.

In addition loyal customers are less likely to seek the lowest prices and the cost of selling to them is much less than the cost of capturing new customers from the competition.

Whilst it may take repeated positive encounters to create customer loyaltyOpens in new window it usually only takes two negative ones to make an enemy for life. There are not many third chances. Consider your own experience and behavior as a customer for a moment and you will recognize these facts, whether in your personal or business life.

The first sale is usually a very small part of the potential lifetime valueOpens in new window of the customer. If a family of four eating out in a pub spend $50 on their first visit they are unlikely to pay for the advertising that attracted them unless they visit very many more times. However, if they ate out once a fortnight for twenty years they would spend $26,000. If you wanted a good share of it you would need to look after them very well. When employees can be persuaded to think of customers having a value of $26,000 rather than just $50 they should take much greater interest in their satisfaction.

It is also true in many cases that the initial sale is only a small part of the client-supplier relationship. When buying cars, household appliances, entertainment equipment, computers and so on the actual purchase is only the beginning of the customers’ relationship with the products, but often it is the end of their relationship with the salesperson. If regular servicing is required or a fault occurs then a relationship with service personnel is needed.

In three years of car ownership there will be several opportunities for the dealership’s service department to demonstrate their customer handling skills and if they get it wrong it is likely that when (or if) the salesman seeks the next sale his extensive training will be to no avail. It is ownership experience which makes the second sale, not the salesman.

Successful organizations plan a customer handling strategy that respects the change in relationships as they develop. Sales people should be heavily involved before the sale and from time to time afterwards. Service people need to be properly trained and motivated to care for customers during their ownership experience.

The Link between Satisfaction and Profit

The link between customer satisfaction and company success has historically been a matter of faith but there is now a growing body of evidence to support the case.

For many companies profit can be traced to customer satisfactionOpens in new window which, in turn is related to employee satisfaction. The strongest relationships suggested by the data collected in survey of satisfaction-profit chain were those between:

1. profit and customer loyalty,
2. employee loyalty and customer loyalty, and
3. employee satisfaction and customer satisfaction.

As suggested, these relationships were self-reinforcing. That is, satisfied customers contributed to employee satisfaction, and vice versa.

It used to be thought that market share was the best determinant of profitability and this led to many mergers and takeovers in the hope that economies of scale would reduce cost and increase profit.

Naturally this works to a degree but there are many exceptions, in which companies who do not have the largest market share are more profitable than those with a bigger share because they have discovered that customer loyalty is more profitable than market share.

Figure X-1 The satisfaction-profit chain

Keep customer longer and make more money

Studies have shown that a 5 percent increase in customer loyalty can produce profit increases of 25 to 85 percent across a range of industries. Retaining existing customersOpens in new window for longer usually has a much lower associated cost than winning new onesOpens in new window, so a large proportion of the additional gross profit goes straight to the bottom line.

Commitment customers stay longer

It is misguided to believe that customer retentionOpens in new window will be achieved through loyalty. This concept simply does not apply in its true sense to most businesses since there is no loyaltyOpens in new window in a commercial transaction.

In commercial markets the onus is on the supplier to convince the customer that it is in the latter’s best interests to remain a customer. It is self-interest, not loyalty that keeps customers loyal.

Commitment is therefore a better word to describe the feeling that produces the benefits of customer retention such as repeat purchase, recommendation and reduced price sensitiveness.

Repeat purchase can be habitual, with very little commitment on the part of the customer and these apparently “loyal” customers can be easy prey for competitors’ advances because they are convinced that their existing supplier meets their long-term requirements better than any other. Commitment is therefore the best lead indicator of retention.

To satisfy customers, meet their needs

To satisfy customers you must meet their needs. You must “do best what matters most to customers”.

It sounds so obvious that it’s not worth saying, but many suppliers don’t do it. They make people queue for lengthy periods, they make them use filthy toilets, they break delivery and service promises and even, on occasions, are downright rude to customers.

A very definite relationship usually exists between dissatisfaction and disloyalty. Unhappy customers are unlikely to return, and will probably discourage others from becoming customers.